After having had a strong run in recent sessions, risk assets finally retreated in US trade as cracks appeared in the fiscal cliff negotiations. Equities were firmer in European trade as markets continued to ride on fiscal cliff optimism and on the back of a better-than-expected German Ifo business climate reading. EUR/USD managed to print 1.33, its highest level since April this year. Unfortunately risk dipped in US trade as the Republicans failed to come up with a reasonable compromise to President Obama's proposal. Republicans may be looking to get The House to vote on its 'Plan B', while the Democrats may veto it. Some analysts blamed disappointing housing starts data for the drop in US equities, but this is unlikely considering the Fed's QE pledge. As a result, with the recent rally having been fuelled by fiscal cliff optimism, market participants decided to exercise caution despite US leaders still insisting they are hoping to have something done by Christmas. This has seen equities and risk currencies retreat from their highs with EUR/USD dropping back to around 1.324, while AUD/USD is now trading below 1.05.
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